global business environment mni 301-j
TRANSCRIPT
GLOBAL BUSINESS
ENVIRONMENT
MNI 301-J
Aregbeshola R Adewale
012 429 8505 1
Introduction • Purpose of group discussions
• Your study material
- study guide
- text book
- relating the study guide to the text book
• Activities
- Format of the examination
multiple choice questions
essay questions
total mark
pass mark
duration of the examination
• Assignments
- Compulsory MCQ assignment 1
- compulsory MCQ assignment 2
2
LEARNING OUTCOMES
AT THE END OF THIS DISCUSSION CLASS, YOU SHOULD BE ABLE TO:
• Clearly define Global Business
• Identify and interrogate the dynamics of Global Business
• Discuss the relevance and challenges of Global Business
• Understand the practical approaches to internationalisation of business
• Define and understand the benefits and challenges of globalisation
• Differentiate between the types of globalisation and their relevance in
international business
• Exemplify the role of culture in international business context
• Integrate cultural dimensions with leadership styles
• Understand the global competitive strategies and the associated challenges
• Global corroborative and strategic a alliances
• Regional economic integration and their associated gains and challenges
3
GLOBALISATION
• What is globalisation?
In summary:
globalisation can be described as the
modernity of global interdependency of
nations that permeates every human
endeavour with various magnitudes, in
causes and consequences
4
Perspectives of globalisation culture and economic:
Cultural perspective - a process which
embodies transformation in the spatial
organisation of social relations and
transactions [...] generating
transcontinental or interregional flows and
networks of activity, interaction, and the
exercise of power” (Held, et al. 1999:16)
5
Perspectives of globalisationEconomic:
Economic perspective - the growing
interdependence of countries worldwide
through the increasing volume and variety
of cross-border transactions in goods and
services and of international capital flows,
and also through the more rapid and
widespread diffusion of technology
(Johnson and Turner (2004)
6
Factors influencing foreign investment• National economic performance
• Political stability
• Attitude of investors
• Government policy
• Availability of infrastructure
• Labour regulations
• Availability of a working banking and financing
institutions
• Government bureaucracy
• General business environment
• Quality of life and the cost of living in a country7
international trade theories• Mercantilism
• Absolute advantage
• Comparative advantage
• Heckscher-Ohlin theory of ‘factors of production’
• The Leontief paradox
• Product life-cycle theory
• New trade theory – questioning diminishing returns in favour of
increasing returns to specialisation
• Porter’s Model of national competitive advantage:
factor conditions
demand conditions
related and supporting industries
firm strategies, structures and rivalry8
Porter ‘diamond model’ for national
competitive advantage
Change
Factor conditions
Firm strategies,
structures and rivalry
Related and
Support industries
Demand conditions
Government
9
Forces driving globalisation
•Political forces
•Economic forces
•Social forces
•Technological forces
10
Economic integration• Free Trade Zone
• Free Trade Area
• Customs Union
• Common Market
• Economic Union
• Political Union11
Barriers to foreign market entriesTWO FOLD: TARIFFS AND NON-TARIFF BARRIERS:-
Tariff barriers- financial levies on imports – taxes or duties
customs duties
ad valorem tariffs
specific duties
Formula or related duties
surcharges
sin taxes
environmental levies
ordinary levies (fuel levies)
12
Barriers to foreign market entriesTWO FOLD: TARIFFS AND NON-TARIFF BARRIERS:-
Tariff barriers- financial levies on imports – taxes or duties
customs duties
ad valorem tariffs
specific duties
Formula or related duties
surcharges
sin taxes
environmental levies
ordinary levies (fuel levies)
13
Non-tariff barriers – quantitative trade restrictions on
imports (non-monetary trade restrictions)
import license
quotas
product standards
local contents
embargoes and sanctions
special import restrictions
prohibitive goods
import deliberate bureaucracy
Barriers to foreign market entries
14
Cases for government
intervention in tradeEconomic
• To protect local jobs & firms
• To protect consumers
• To protect foreign reserves
• To nurture infant industries
• To promote local manufactures
• To engender local branding
• As a tool for trade remedy
• Economic retaliation
Political • To advance political agendas
• For national security
• Food security
• To gain political recognition
• To win electoral votes
15
Trade remedies
Unfair trade remedies
• Anti-dumping
• Countervailing
- offsetting the
benefits of subsidy
Fair trade remedies
• Safeguards
- industrial safeguards
• Agricultural safeguards
• Special safeguards
- offsetting excessive
imports
16
Economic Integration
Definition:
- grouping of countries by agreement or
treaty.
- ensuring free movement of persons,
goods, capital, and services; by following
a coordinated policy in the economic,
financial, and social fields; and by
pursuing a common policy with regard to
non-member countries.17
The euro• The official currency of the
European Union.
• On January 2, 2002, the new
European currency, the euro,
became official in 12 countries.
• The original currencies were no
longer accepted in transactions
after Feb. 28, 2002.
• Currently has 17 members with
the ascension of Estonia on 1
Jan. 2011
The euro zone• The European countries that
adopted the euro as their official
national currencies are known as
the eurozone.
• Denmark, United Kingdom, and
Sweden are not part of the
eurozone, but remains part of the
E U.
• More E U members are joining the
eurozone.
• Currently has 27 members
The European Union
18
Impacts of the euro
Advantages • Greater business opportunity
(enlargement of the market)
• Decrease in monetary
transaction costs (forex)
• Price stability and equity
amongst member nations
• Favourable variable revenue
for companies listed on the
EU stock markets
Disadvantages • Possible loss of market share
in national markets due to
international competition
• Instability in the eurozone will
affect their foreign trade
partners (TDCA) – risk
aversion
• Lower interest rates in the
eurozone may lead to trade
creation in the EU
19
Achieving a working economic integration
• Same / close geographical location of member nations
• Easy access to one another – an effective and efficient
transport system
• Considerable natural resources and productive human
capital
• Formal treaty / agreement
• Technologically advanced telecommunication system
• Effective and efficient banking and financial institutions
• Cultural adaptability/ homogeneity
• Geopolitical equity and socio-economic stability in member
nations
20
Culture in international business
Definition of culture:
Culture is the system of shared
beliefs, values, customs, behaviours,
and artifacts that the members of
society use to cope with their world
and with one another, and that are
transmitted from generation to
generation through learning
21
22
Culture is more often a source of
conflict than of synergy. Cultural
differences are a nuisance at best
and often a disaster."
Prof. Geert Hofstede,
Emeritus Professor,
Maastricht University.
Culture!!!
Components of culture • Attitudes - a hypothetical construct that represents an
individual's degree of like, dislike, conflicted or
ambivalent for an item; they are the established ways
of responding to people and situations that we have
learned, based on the beliefs, values and assumptions
we hold. Attitude become manifest through our
behaviour.
• Beliefs - the assumptions we make about ourselves,
about others in the world and about how we expect
things to be; how we think things really are, what we
think is really true and expected likely consequences
of our behaviour. 23
• Norms - the rules of behaviour that are part of the
ideology of the group. Norms tend to reflect the values
of the group and specify those actions that are proper
and those that are inappropriate, as well as rewards
for adherence and the punishment for dissidence.
• Values - beliefs of a person or social group in which
they have an emotional investment (either for or
against something). Values exert major influence on
the behaviour of an individual and serve as broad
guidelines in all situations
Components of culture
24
Culture: C & E
Characteristics• Culture is learned
• Culture is shared
• Culture is relative
- no generally acceptable standard
- no superiority of any culture over the
other
• Culture is interrelated
• Culture is adaptive (it changes)
• Culture is symbolic
Elements • Religion
• Social structure
- individuals, families and groups
• Language
• Education
• Economic philosophy
- Economic systems and structures
• Political philosophy - political structures and ideologies
25
Christianity (Protestantism)
• Predominantly Protestant
countries has had far greater
economic implications than
Catholicism (Max Weber,
1904)
• Better economically developed
• Ethics of hard work,
productivity, savings,
reinvestment of capital, wealth
creation.
• Firmly established capitalism
in Europe and North America
Islam • Just profiteering acceptable
• Business dealings should be
conducted justly, charitably and
humbly.
• Payment and receipt of interest
prohibited
• Reiterates the importance of
honesty and honouring of
contractual agreements/
obligations
• Strong political pressures to protect
religious traditions
Implications of religions on
economy/ business
26
Culture in the workplace
High-context
• Values long-term
relationship
• Regards trust as very
crucial in business
negotiations
• Effective adverts must be
emotion-oriented
• A good emotional social
setting is essential for
decision-making
Low-context
• Values contextual business
relevance
• Places credence on specific
terms of agreements and
transactions
• More factual advert contents
arouses patronage
• Impersonal decision-making
process, while avoiding
conflicts of interests
27
The cultural web of an
organisation
Control systems
Stories and myths Symbols
Power structures
Organisational structures
Rituals and routines
The paradigm
28
Hofstede’s cultural dimensions• Power distance index
- equal distribution of power
- blind obedience of orders is a
characteristic of a high power
distance society
- concentration of power is rebuffed in
low power context societies
• Individualism/ collectivism
- ties among individuals are loose
- individual achievements are celebrated
• Masculinity/ femininity
- in masculinity, men are assertive
- differentiated gender roles and
responsibilities
• Uncertainty avoidance
- the extent to which a society accepts
and prepares for change
- high uncertainty avoidance society is
reticent to unstructured situations
and abhors abrupt change
- a low uncertainty avoidance society is
characterised by risk taking,
entrepreneurship, innovation and
lesser regulatory framework
• Long-term orientation
- time preference on work, life and
other perspectives
- value dedication, hard work,
tenacity; cherishes allegiance
29
International political, legal and tech. environment
• Introduction:
Multinational enterprises (MNEs) operate in
countries that are characterised by different
political, legal, technological and economic
frameworks, diverse levels of economic
development, and economic conditions.
These MNEs bring a frame of reference
based on their domestic experience as well
as lessons from foreign settings
30
Rivalry
Potential
competitors
Buyer power
Substitutes
Supplier
power
Political and
Legal environmentTechnological
environment
Demographic
environment Social environment
Macroeconomic
environment
The political economy
31
The legal environment
The legal environment is derived partly from the
political climate in a country and has three
dimensions:
1. The domestic laws of the exporter’s country
2. The domestic laws of each of the exporting
country’s foreign markets, and
3. International law
32
Different legal systemsThe legal systems of most of the non-
socialist countries can be grouped into common law and code law.
• Common law is generally based on precedents or past practices
• Code law is a comprehensive set of volumes having statutory force and covering the whole spectrum of the country’s law such as speed limit of 80 kph
33
Legal environment and the
impact on investment strategies
• Companies deal with political and
legal issues at different levels as they
become more international
• If a company selects exporting as the
mode of entry, management is not as
concerned with the political process or
with the variety of legal issues as
would be the case with a FDI34
Legal environment and the impact
on investment strategies• In countries where the legal framework for
protecting investors is weak, entrepreneurs and
managers cannot credibly convince investors
that their money will be efficiently used and
returned to them as high future returns
• The expectation of future conflicts of interest is
reflected in low prices for shares at the time of
offer and discourages entrepreneurs and
managers from fully diversifying
35
Legal environment and the
impact on investment strategies
• Evidence shows a strong positive
relationship between the quality and
efficiency of a country’s legal system and
its level of economic development
• Concentration of managerial ownership
provides an important clue about the
source and causal direction of the
relationship36
Technological environment Definition
• Technology can be defined as the method
or technique for converting inputs to
outputs in accomplishing a specific task
• Technological innovation, then refers to the
increase in knowledge, the improvement in
skills or the discovery of a new or improved
means that extends people’s ability to
achieve a given task
37
Impact of the technological environment
• Computer technology has had an enormous impact on education and health care
• The introduction of robots in many factories has reduced the need for labour
• The use of VCRs and micro-computers has become commonplace in many homes and business
• The introduction of nuclear weapons has made the destruction of the human race a frightening possibility
• Technology is a critical factor in economic development
38
Political involvement and its impact• The greater the level of involvement in foreign
markets, the greater the need to monitor the political climate of the countries in which business is conducted
• Changes in government often result in changes in policy and attitudes towards foreign business
• Nearly all present-day governments are active in their countries’ economies
• The implications of government ownership to a company marketing abroad might be that certain sectors of the foreign market are the exclusive preserve of government enterprise
• Of primary concern to an exported should be the stability of the target country’s political environment
39
Political riskA checklist for assessing the political risk of a particular country will include the following aspects:
• Form of government and length of leadership in power
• Extent of leadership changes and history of government stability
• Volatility of electorate and popular support for leadership
• Role of military in politics and religious, ethnic or ideological splits
40
Political risk• Amount of political participation allowed or
tolerated through demonstrations, lobbies, professional associations and other informal interest groups
• Prospects for domestic political violence and internal security forces per 1 000 of the population
• History of coercion and regional political alliances
• Trade or labour disputes
• External threats to suppliers or markets
41
The political environment
• The political environment in a company’s home country and the host countries are important external influences on management
• An attractive economy may prove to be financially disastrous if host governments inflict heavy financial penalties on a company or if unanticipated events in the political arena lead to the loss of income-generating assets
42
The political system and its functions
• The political system is designed to
integrate the parts of a society into a
viable, functioning unit
• A country’s political system has an
enormous impact on how business is
conducted domestically and/or
internationally
43
The economic environment
The political and legal systems influence the types of economic system of a country:
Countries characterised by :-
• High levels of economic development;
• Enhancing strengths / supporting economic policies and strategies; and
• Prospects for sustainable future economic growth -
present attractive opportunities for international business involvement
44
Economic systemsDefinition:
A country’s economic system is
defined as the structure and
processes a country uses to
allocate resources to conduct
its commercial activities
45
• Prevailing economic systems, and legal systems, determine the potential benefits, costs and risks of doing business in a country
• Existing economic systems include: a market economy, a command economy, a mixed economy, and a state-directed economy
• Economies tend to lie somewhere on a continuum between a market economy and a command economy
Economic philosophy
46
Types of economic systems A market economy
• Private ownership of the majority of land, productive facilities and other resources
• Freedom of choice, free enterprise and price flexibility
A command economy
• State ownership of land, productive facilities and other resources
• State planning of economic activity
47
Classification according to phases
of economic development
From a developmental perspective, countries are classified as:
• Developed (industrialised)
• Developing (newly industrialising countries (NICs) or emerging economies)
• Less developed (very poor countries)
48
Further classificationDeveloped countries
• Political stability, high levels of education, high standards of living and actively involved in international business and foreign trade
Developing countries
• Relative political stability, improving educational systems, no longer extensively dependent on agriculture and mining and increasing international business involvement
Less- developed countries
• Political instability, government inefficiency, low levels of income, inadequate education and social services, and low level of international business involvement
49
Macro-economic issues in
international businessPurchasing power parityTo accommodate differences in cost of living between countries, per capita
GNP and GDP data have to be adjusted for differences in purchasing power
between countries, by means of ‘purchasing power parity’ (PPP)
GNP (or GNI) and GDP These are measures of a country’s economic activity during a specific period, normally a year.
• GNP (or GNI) is the market value of final goods and services newly produced by domestic factors of production, whether domestically or abroad
• GDP is the market value of production that occurs within the national borders of a country without regard to whether production factors are domestic or foreign
50
Measures of the level of
economic growth• Purchasing power – the value of goods and services, that can
be purchased with one unit of a country’s currency
• Purchasing power parity (PPP) is the relative ability of two
countries’ currencies to buy the same ‘basket’ of goods in these two
countries
• The Balance of Payment (BOP) is a systematic record of all
transactions between the residents of a country and the rest of the
world during a given period, usually a year
- The BOP is divided into the following accounts:
The current account
The financial account
51
Relevance of BOP
BOP statistics can help to:
• identify emerging markets
• warn international firms of policy changes in a foreign
country that could affect its business climate and
overall attractiveness
• Identify increased risk of lending in specific countries
• indicate reductions in a country’s foreign exchange
reserves, which could be an indication that a country’s
currency will depreciate in the future
52
Measuring inflationInflation is measured by the inflation rate,
which is the percentage increase in the change
in pries from one period to the next, (usually a year).
The inflation rate is measured by means of
indices such as:
• Consumer price index (CPI)
• Core inflation rate (CPIX)
• Price changes in selected food items (CPI
Food)
• Production price index (PPI)53
Implications of inflation for
international business
High inflation rates lead to high interest rates
It can reduce domestic demand
It weakens the purchasing power of the local
currency
it relatively increases the pricing of imported
goods
It can adversely affect economic growth
54
Risk in the international environmentEnvironmental risk
• The threat that events in the environment will adversely affect a company’s ability to implement its strategies and achieve its goal
Government intervention
• Taxes
• Import controls
• Payments
• Legal issues
• Industrial disputes
• Operational interference
• Unfair public sector competition55
Strategic alliance defined:-
It is ‘a cooperative arrangement
between two or more local and/or
global firms that can affect the
competitive positioning of either
participant in the market segment in
which they set out to compete’
Global collaboration and strategic alliances
56
Reasons for alliances with foreign partners
To seek out new markets as a way ofsustaining or increasing growth in sales andprofits
To achieve lower development, research andmarketing costs
To share naturally dispersed resources
To access natural resource deposits in othercountries
To do business in a politically more stableenvironment
To learn new skills from competitors
57
Modes of entering foreign markets
The six most often used modes of entering foreign markets are:
1. Exporting
2. Licensing
3. Joint ventures
4. Franchising
5. Turnkey operations
6. Setting up of a wholly owned subsidiary in the foreign country(ies)
58
Advantages and disadvantages
of entry modes
Entry mode Advantage Disadvantage
Exporting Ability to realise location
and experience curve
economies
High transport costs
Trade barriers
Problems with local
marketing agents
Turnkey
contracts
Ability to earn returns
from process technology
skills in countries where
FDI is restricted
Creating efficient
competitors
Lack of long-term market
presence
59
Entry mode Advantage Disadvantage
Licensing Low development
costs and risks
Lack of control over technology
Inability to realise location and
experience curve economies
Inability to engage in global
strategic coordination
Franchising Low development
costs and risks
Lack of control over quality
Inability to engage in global
strategic coordination
Advantages and disadvantages…
60
Advantages and disadvantages…
Entry mode Advantage Disadvantage
Joint ventures Access to partner’s knowledge
Sharing development costs and
risks
Politically acceptable
Lack of control over
technology
Inability to engage in
global strategic
coordination
Inability to realise location
and experience economies
Wholly owned
subsidiaries
Protection of technology
Ability to engage in global
strategic coordination
Ability to realise location and
experience curve economies
High costs and risks
61
Global Money management
62
The process of budgeting,
saving, investing, spending or
otherwise in overseeing the cash
usage of an organisation
Components of money management
63
Minimising cash balances
Reducing transaction costs
Centralising depositories
Judicious allotment of internal
funds
Optimal allocation of funds
Multilateral netting
Foreign ExchangeThe foreign exchange market is a global market that
provides both physical and institutional financial
structure for foreign exchange transactions.
The foreign exchange market is a virtual form of
institutional arrangement – without a physical office
location, or physical structure.
The market determines and regulates exchange rates
movement and transactional procedures through the
agents of intermediation that are scattered across the
globe.
64
Functions of the FOREX Market
1 Converting currencies• The payments firms receive from exports, foreign investments, foreign profits, or
licensing agreements may all be in a foreign currency. In order to use these funds in
its home country, an international firm has to convert funds from foreign to domestic
currencies.
• A firm may purchase supplies from firms in foreign countries, and pay these suppliers
in their domestic currency.
• A firm needs to convert its local currency into the host country’s currency in order to
carry out offshore investments.
• A firm may want to speculate on exchange rate movements, and earn profits on the
changes it expects. If it expects a foreign currency to appreciate relative to its
domestic currency, it will convert its domestic funds into the foreign currency -
currency speculation.
• Exchange rates change on a daily basis. The price at any given time is called the
spot rate, and is the rate for currency exchanges at that particular time. To effectively
manage international finances, it is important to continuously monitor the current
exchange rates.
65
Functions of the FOREX Market…
2 Financial risk aversion
• The fact that exchange rates can change on a daily basis depending upon
the relative supply and demand for different currencies increases the risks
for firms entering into contracts where they must be paid or pay in a foreign
currency at some time in the future.
• Forward exchange rates allow a firm to lock in a future exchange rate for the
time when it needs to convert currencies. Forward exchange occurs when
two parties agree to exchange currency and execute a deal at some specific
date in the future.
• When a currency is worth less with the forward rate than it is with the spot
rate, it is selling at forward discount. Likewise, when a currency is worth
more in the future than it is on the spot market, it is said to be selling at a
forward premium, and is hence expected to appreciate.
• A currency swap is the simultaneous purchase and sale of a given amount
of currency at two different dates and values, in order to maximise
transactional gains.
66
Activities of Int. Financial Mgt. • Capital budgeting/investment: critically analysing, planning,
managing, and mentoring of the organisation’s portfolios (both
in the short and long run).
• Maintaining an expedient capital structure: identifying and
securing the most optimal sources of long term funding, and
maintaining the most favourable combination of debt and equity
levels.
• Working capital management: managing the level and the
composition of the organisation’s liquidity.
• Manage the books of account of the organisation in conformity
with the globally acceptable standard and prescripts.
• Strive towards achieving a balance between the financial goals
of the organisation and other stakeholders’ interests in the
organisation.67
Transfer pricing Transfer pricing refers to the setting, analysing, documentation, and
adjustment of charges made between related parties for goods, services,
and or use of property (including trade mark, goodwill and intellectual
property).
Transfer pricing is simply the act of pricing of goods and services or intangibles
when the same is given for use or consumption to a related party (e.g.
Subsidiary)
Transfer pricing is the rates or prices that are utilized when selling goods or
services between company divisions and departments, or between a parent
company and a subsidiary. The transfer pricing that is set for the exchange
may be the original purchase price of the goods in question, or a rate that is
reduced due to internal depreciation
These prices may be:
1 Market-based: as determined by the demand and supply in the general
market).
2 Artificially-determined: as determined by the supplier of the item itself based
on self-judgement.68
Benefits of Transfer pricing• High Customs Duty – leading to under-invoicing of
goods.
• Restriction on Profit Repatriation – leading to over-
invoicing of raw materials transferred from parent
country, hence compensating for locked forex.
• Ownership Restrictions (e.g. Insurance and banking
sectors – since this leads to less than justified
returns on the technology or knowledge invested in
the JVs, MNEs circumvent it through over charging
on royalties for technology, etc.
69
Problems with Transfer Pricing • Tax evasion: multinational entities may set transfer prices on cross-
border transactions to reduce taxable profits in their jurisdiction. In
this case, governments are always enervated by tax losses.
• Movement of fund: MNEs use transfer pricing to move funds to tax
havens or to circumvent profit repatriation restriction. Where this is
done, governments generally consider the act as fraudulent and
criminal.
• Performance bonus: if the performance bonus of managers are tied
to book records, then the larger they benefit from transfer pricing, the
better.
• Monopolist idea: transfer pricing does not encourage competition as
the supplier-firm is featherbedded. Supplies are internal, so the
supplier is not exposed to external competitive pressures – price and
quality.
70